The Market Mind Hypothesis, page 19
The market’s mind is the composite of our own extended minds, supported by advanced and extensive technologies. Specifically, the investor and her terminal form economics’ version of, what Clark and Chalmers call, a “coupled system” (1998, p. 8; see also Prologue). In turn, these coupled systems collectively form, what Knorr Cetina and Bruegger call “epistemic things” (2000, p. 3). This results in supercharged and supersized “active externalism” (Clark and Chalmers, 1998, p. 8): it extends to the wider real economy in support of collectively adapting to states of the world. That the market mind is extended is basically the modern update of earlier reflections on group minds and more particular the arguments provided by Smith, Hayek, and other pioneers of distributed cognition. The MMH adds that it is unrealistic to place the boundary of such extension at the frontier of consciousness, let alone the skull. In other words, cognitive extension includes consciousness by way of intersubjectivity, primarily manifested as market mood.
For the MMH, this last property, extension, is the most important of the 4Es. It not only includes incorporation and integration of the tools investors use into a collective coupled system, but also the cognition they help to produce. The cognition collectively produced in extension will namely be incorporated and integrated back into the individual minds which constitute the market mind. In the process this can particularly lead to the phenomenal realisation of information as the emergence of market mood that changes the overall phenomenological status of the market as coupled system. In broad strokes, let’s remind ourselves what this is about. In terms of intentionality, individual investors have their specific (for instance, ESG-coloured) goals. They express their behaviours, directed towards those goals, through their trading strategies. For example, investors can focus on a specific sector like energy. Their portfolios will also integrate any local information, like that received from the companies in that sector. So, as a group they form specialised cognitive, ideally heterogeneous, clusters within the economic system. And what they share is the common goal of increasing wealth, i.e. generating profits in their respective portfolios.
What they, as a collective, do not explicitly pursue, but what nevertheless emerges—via the invisible hand—from their exchange, is the most effective (albeit not perfect) allocation of resources for the broader society. Together with their technologies they achieve a socio-technical symbiosis. They form an integrated mixture of carbon and silicone extended intelligence, resulting in a wide distribution of informational resources. Consequently, having ‘eyes and ears’ in all corners of the world, the market embeds any news in prices. In turn, this allows us to collectively adapt to changing features of that world. Regarding the unconstrained nature of this portfolio of organic and worldly resources, Clark calls it the “Hypothesis of Cognitive Impartiality” for general cases:
Our problem-solving performances take shape according to some cost function or functions that, in the typical course of events, accord no special status or privilege to specific types of operations (motoric, perceptual, introspective) or modes of encoding (in the head or in the world). (Clark, 2011, p. 197)
It explains why “the storage, processing, and transformation of information is spread so indiscriminately among brain, body and world” via “a motley crew of neural, bodily and external resources” (Clark, 2011, p. 197). This last point of diversification is important and something I discussed in terms of both idd-minds and live-securities. Namely, by implication, a lack of diversification can impair “our problem-solving performances”. With that caveat, “once we start to question our received visions of the normal division of labor among brain, body, and world, it becomes clear that there is no barrier to the realization of cognition and control supporting organisations by very complex admixtures of neural, bodily, and environmental elements” (Clark, 2011, p. 213).
Can we be more specific about aspects of collective and shared mentality? Among others, the MMH needs to confront the challenges of individualism and internalism (see Appendix 1). For example, in the cognitive literature (e.g. Léon et al., 2017; Thonhauser, 2018) a number of requirements have been proposed in order to judge emotions as shared. The Dutch cultural psychologist Batja Mesquita argued further that: “Many cultures don’t think about their emotions as something that lives inside of an individual, but more as something between people. In those cultures, emotions are what people do together, with each other. So when I’m angry, that is something that lives between you and me” (Pogosyan, 2018). Chapter 8 asserts in more detail, by applying portfolioism, that market emotions meet those requirements. For now, market emotions occur at various levels of aggregation, from groups to asset classes to the overall market. To explain, let’s look along several aspects at the shared emotion of fear for ‘bulls’ in the hypothesised situation of a correction in the market which hurt their ‘long’ position:
Intentionality: bulls share the directedness of fear, in the sense that their minds are occupied by it, in light of their focus on the danger that their wealth will diminish.
Affectivity: bulls not only share fear in a functional cognitive way, that is in an evaluative sense, but also in an affective, experiential way. They feel similarly stressed, with possible symptoms including sweat, irritation, and headache.
Plurality: bulls are aware that other bulls partake in the experience of fear, reflected in the faces and voices of their colleagues, in communication with clients and in the media.
Integration: bulls sense their togetherness (especially vs the ‘bears’) as characteristic for their experience of their (market) suffering.
Finally, we can judge markets’ collective agencies properly when we:
understand agency as a spectrum that varies along dimensions of individuality, interactional asymmetry, and normativity rather than as an all-or-nothing concept in which necessary and sufficient conditions either are—or are not—instantiated. On such an understanding agency is not necessarily lost when, for example, interactional asymmetry is temporarily reversed or absent. Furthermore, it can help explain how agency may be being instantiated even if it may not be clearly visible at both the level of the collective and the component at the same time … [because] both the agency of the components, and the agency of the collective are spectra, and both will differ individually not only along the dimensions of individuality, interactional asymmetry, and normativity but also through time. (Stapleton and Froese, 2015. p. 233–234)
A more detailed explanation of extension will follow in Subchapter 3.2. Next, I will address the issue of internality from a particular angle.
2.4.1.2 Securities as the Neurons of the Market Mind
There are a number of aspects to the MMH that make it stand out compared to other heterodox theories. Here I will discuss its view on securities as the ‘neurons’ of the market mind. A security is the financial instrument (historically in the form of a certificate) for which the price is paid in the exchange between buyer and seller. This distinguishes the MMH from most traditional agency and (neural) network models which use artificial robots (agents) for ‘neurons’.
Like neurons:
Securities pass on information. Their main signal is quantified in their price, which also contains noise, just like neuronal noise (Schotanus and Schurger, 2020). But they also represent other information, for example about the issuer, and whether it is a stock or a bond.
Securities cluster in complex (e.g. hierarchical) layers and networks, by way of assets, industries, sectors, and so on. They form the market mind’s ‘cortical regions’, ‘neuronal assemblies’, and ‘affective systems’, which have feedback-loops among themselves as well as with the environment. Price discovery, involving the simulcasting of information from such networks, leads to the market’s awareness.
Whereas brains are the central organ to house neurons, supplemented by the stomach and the heart, the exchanges (CBOT, IEX, NYSE, SGX, TSE) are the equivalent for securities.
These points are very important to understand. The MMH considers securities as the market’s ‘neurons’ because there has to be a shared physical structure located outside individual agents to be able to extend and connect their minds. Why? Because otherwise we keep encountering the issues of individualism, internalism, and personal intentionality. In contrast to the MMH, approaches like agency modelling generally simulate individual investors via bots as the ‘nodes’ in the network from which the price signals originate. Their problem is that there is no way for those nodes to connect because there are no external objects of shared intentionality. It is only because of the physical (i.e. paper, now mostly digital) existence of securities that the market can act as a valuation system, with prices as their main conduits of information. Consequently, prices are not associated with individual buyers or sellers. Prices give information about the security they are quoted for which are ‘out there’. Moreover, it is the security where collective intentionality and joint attention is focussed. In short, securities facilitate the “active externalism” (Clark and Chalmers, 1998), or active cognition, required for the extension of individual investor minds into the market mind. Stated differently, securities are the physical47 conduits in active externalism in the case of the market’s mind. They meet the requirement whereby subjects’ “cognitive processes and mental states can be partly constituted by entities [securities] that are external to the subject[s], in virtue of [their] interacting with these entities via perception [price] and action [trade]” (Chalmers, 2019, p. 5). The infrastructure, technologies, and other physical structures that facilitate their existence and functioning (e.g. via issuance, trading, custody or collateral) complete the ‘scaffolding’ of that extended mind.
For all clarity, securities remain largely symbolic (e.g. AAPL, BRK.A, and PG): “We shouldn’t suppose that the properties of vehicles must be projected into what they represent for subject/agents, or vice versa” (Hurley, 1998, p. 1). Securities’ prices convey the consumption and production of information, the dual realisation of which (see Appendix 1-A) results in distributed cognition (quantitatively) and intersubjectivity (qualitatively). In addition, securities not only store legal claims (like ownership) but embody the narratives as well. So, when you buy AAPL you buy (into) the Jobs~Wozniak story, when you buy BRK you buy (into) the Buffett~Munger legend, and when you buy TSLA you buy (into) the whole Elon Musk show.48
At the same time, securities are obviously not literally neurons and the differences between the human and market mind arise generally from the differences in the interfaces, e.g. connections, between their respective subsystems.
2.4.1.3 Other similarities and Main Assumptions
What are some of the other similarities between our mind and the market mind?
Like our mind, the market mind allocates resources. I’ve discussed this already.
Like our mind, the market mind is Bayesian to the extent that it is continuously testing hypotheses as part of its predictive processing (see Subchapter 3.3). Whereas our mind is busy limiting free energy, the market’s mind is limiting free lunch (e.g. via arbitrage). Still, uncertainty means for both that attributions of probability are not fixed and that probability distributions, while sometimes stable, can change abruptly and discontinuously. In extreme cases, these changes turn into reality checks and show up, for example, in schizophrenic ‘double-headed’ return distributions. Still, evolutionary rationality criticises Bayesian applications and highlights their limitations (see Appendix 1-B4).
Like our mind, the market mind is active during certain hours. At other times it is in various states of sleep, depending on which (and where) securities are actively traded.
Like our mind, the market mind acts partly unconsciously. ‘Forgotten’ experiences of past events (albeit recorded in historic prices) and the activity surrounding private information are examples of unconscious market processes that provide context of which Mr Market is not aware. Private information (including inside information) is thus one example where awareness at the micro (individual) level does not translate into macro awareness.49 The growing technological unconscious (see Appendix 1-A) adds another dimension to this.
Like our mind, the market mind’s health can vary. Monetary policies are examples of physical drugs and psychological treatments that can affect its health. There is a direct link here. From neuroscience we know that anticipated financial gains (say due to QE by the Fed to generate the wealth effect) stimulate the same part of the brain as drugs like cocaine do. Finally, hypes are examples of narrow-mindedness which reflect an unhealthy attitude.
Like our mind, the market mind impacts the world through action. The latter was discussed in the section on enactment in 2.4.1.1. Whereas goal-directed movement (e.g. Mises’ “purposeful action”) is the transmission with which our mind impacts the world, capital movements (e.g. via investments, flows, and trades) are the transmission with which the market mind impacts the real economy.
Like our mind, the market mind can lose consciousness. The GFC (via Lehman’s collapse), the CVC (via repo-stress), and the LDI-crisis (via gilt-stress) almost caused a coma. Whereas neurons stop communicating in the human mind, securities stop communicating in the market mind, starving the economic system of price signals.
Let me further specify the main assumptions and observations underlying the MMH, starting with the components that form the market mind from the bottom-up:
The investor’s mind is a complex adaptive system at the microscopic level, like any human mind (e.g. Bressler and Kelso, 2001; Edelman and Tononi, 2000; Hayek, 1952; Kelso, 1995; McClelland, Rumelhart and Hinton, 1986; Morowitz and Singer, 1995; Port and Van Gelder, 1995; Thelen and Smith, 1996). Its complexity results from the multi-level exchange of its mind~body components, including with other mind~bodies.
Causality is elusive and mental efficacy a challenge to pinpoint. As highlighted in Predictive Processing Theory (chapter 3), the investor’s mind—in particular its internal causal perception—is able to track the external causal structure despite having no direct access to its causes. Specifically, causes are hidden because the only inputs that brains can work with are derived ‘data’ in the form of the effects of stimulated senses.
The investor’s mind exists and is experienced as real at the individual level. Specifically, the interiority of the investor’s mind, i.e. the subjective experience of consciousness, is arguably the most unique among its emerging properties. In the spirit of both James (1890) and Nagel (1974), there is ‘something it is like’ to be an investor. For the individual investor this experience is not an illusion but a phenomenal fact with distinct quality: the feeling to participate and be invested in the markets is trenchant. By taking a long, short or flat investment position an investor makes a commitment to (potential) states of the world and the exposure and subsequent outcome of such a trade matters; it makes a difference. Such outcomes are reflected in but also impressed by prices.
That difference is not limited to the individual investor. The investor’s mind is not isolated from its environment—in this case financial markets—which embody millions of investors’ minds, directly or indirectly. Their deliberations (by discussing themes), interactions (by way of trading) and interconnections (using computers) create an extended composite mind, a complex system at the macroscopic level.50 The conduits for those exchanges are securities, with their prices acting as (symbolic) information carriers.
This composite mind evaluates physical events and objects in the real economy, and reflexively expresses its mental responses (i.e. valuations) in prices51 and their patterns. Its internal causal assessment, by way of price discovery, therefore has the ability to track the external causal structure without direct access to real-economy causes. This is comparable to the primary function of cognition in the human mind. Consequently, we can state that the market exhibits mental states which, objectively, are expressed via price constellations with securities as contractual scaffolding.
Moreover, these states embed the intersubjective essence of the market’s mind: by way of price dynamics—with emphasis on movement—they are experienced collectively by investors. They are the market’s version of shared sensations (e.g. Robinson, 2013; Newen, de Bruin and Gallagher, 2018), with varying degrees of uniformity in those experiences. It adds the plural first person perspective, or rather the second person perspective (e.g. Hut and Shepard, 1996; de Quincey, 2005; Kelso and Engstrøm, 2006), over and above the (singular) first person perspective. Unfortunately this complicates the original hard problem even more.52 At the same time, this can be no excuse to simply ignore it. In fact, this has been the case for too long (considering, again, the early but forgotten criticism of Knight in 1925).
Historic time series are the recorded memories of the market’s mind.53 From an evolutionary perspective, the regularity and uniformity of their patterns, across time and locations, suggests a common denominator in market mentality.54 In the words of legendary trader Jesse Livermore: “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature” (Lefèvre, 1923, p. 180). Ignoring noise, that common denominator is likely a combination of a shared primordial source and a shared singular culture. In other words, nature and nurture complement each other and their influence is broadly the same for all investors. The MMH speculates that (our sense of) the nature of numbers themselves plays a role (see Chapter 7).
